Case Study – cash flow forecasting

When it comes to your business accounts, do you know what your cash flow looks like for the next few months? Do you know what the future looks like? Have you got enough money to pay your liabilities as they fall due? Do you know when your business may run out of money?

Partner Mark Pearson was recently approached by a company in the IT sector who wanted to see what the likely performance of the business would be over the next 4 years based on different scenarios as they were struggling to meet liabilities as they fell due.

Mark scheduled a meeting with his client to discuss the current position, the business moving forward and the opportunities and threats that the business faced.

Current process

The company currently prepares management accounts on a quarterly basis. Often these are prepared about 6 weeks after the quarter-end. The management accounts are a very useful tool to assess the business and profitability but often don’t consider the bigger picture and the business moving forward. 

During the meeting on the management reports, it was established that the company was experiencing difficulty with paying the forthcoming HMRC liabilities on time. The business and the owners were not aware what the next few years would look like.

The existing business and any opportunities and threats were discussed. It was agreed that cash flow forecasts should be prepared to see how the business is likely to perform in the future. Also, to see if it could meet its liabilities. It was agreed that it would be useful to assess the cash flow of the business. 

Forecasting, what is it?

Forecasting estimates the expected income, expenditure and cash flow of the business to see how it is likely to perform in the future. A cash flow forecast assesses whether it has enough funds to continue.

The process

The most recent management accounts were taken which were the results for the first 6 months of the year. These were entered into our forecasting software.

A meeting was then scheduled with the client to discuss all aspects of the business:

• What the likely monthly turnover was going to be for the next 4 years
• What the expenses of the business were likely to be and how much these should be increased on a year-by-year basis for inflation
• A review of the current pay structure, factoring in pay increases, overtime and any additional staffing requirements
• Does the company require any assets like computers, office equipment and stock?

Once all the information was collated, Mark input all the data into a forecasting program which prepared a profit and loss, balance sheet and cash flow for the next 4 years. 

This data was reviewed and a first draft was sent to the client with initial comments and considerations.

Mark made a follow-up appointment with the client to discuss the forecasts and make any necessary changes.

Once the final forecast was available, a final meeting was held with the other directors to discuss the options and what was required for the business to continue operating.

The Outcome

Despite their initial concerns, the long-term forecast for the business looked positive based on the projections and estimates Mark prepared. The next 6 months were going to be challenging and it was recommended that the client should look to secure some additional finance for the short term. This was arranged, and the client ended up settling the finance early due to better-than-expected performance.

Cash flow is an integral part of every business and should be always considered.

If you have concerns about your cash flow or want to see what the future will look like, forecasts are a very useful tool.

Speak to your usual contact at Lambert Chapman who will be more than happy to assist.